ACTBFAR – Basic Financial Accounting and Reporting

TOPIC – ACCOUNTING FOR PARTNERSHIP PART 2

This review materials cover:

• Partnership Dissolution
• Partnership Liquidation

ALTERNATE RESPONSE (TRUE OR FALSE)

1. A bonus and asset revaluation may occur at the same time when the partnership
assets are adjusted, and the new partner’s capital credit is different from his actual
contribution.
2. The consent of all the partners is necessary when partnership decided to admit a
new partner.
3. Investment of an existing partner to the partnership results to the dissolution of a
partnership.
4. The insanity of a partner causes dissolution of a partnership.
5. When there is a change in the ownership structure, the original partnership is
dissolved and often a new partnership is created.
6. The effect of the asset revaluation is carried to the capital accounts of the old and
new partners.
7. The two methods, Bonus and Asset Revaluation offer same results as to the capital
balances of the remaining partner.
8. A new partner may be admitted to the partnership by investing cash only in the
partnership.
9. When a new partner is admitted by the investment of assets, both the total net
assets and the total capital of the partnership increase.
10. A bonus to old partners results when the old partner's capital credit on the date of
admission is less than the old partner's investment in the firm.
11. The total assets of a partnership usually is not affected when an incoming partner
purchases the interest of an existing partner.
12. Partner C is an incoming partner who acquires 20% interest in AB Partnership by
acquiring half of the interest of A. This transaction will most likely require a debit in
the partnership books for the cash payment of C.
13. The admission of a new partner through purchase of interest is recorded by
debiting the capital account of the selling partner (s) and crediting the capital
account of the new partner for the redistribution of capital interests.
14. The entry to record the admission of the new partner by investment depends upon
the capital interest credited to the partners’ account.
15. The preliminary step to withdrawal and retirement of a partner is to compute and
distribute profit or loss to the partners in their profit or loss ratio on the date of the
dissolution.
16. The withdrawal of a partner may be accomplished by payment from partnership
assets only.

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 17. When a partner retires, it is necessary to determine the adjusted partner's equity
at the date of withdrawal.
18. Retirement of a new partner may sell the interest to a new partner (outsider). The
sale is recorded in the same manner as in the admission of a new partner by
investment.
19. When the payment to the retiring partner is more than the book value of his/her
interest, the excess payment can be viewed as Asset revaluation decrease
attributable to all the partners.
20. When the payment to the retiring partner is more than the book value of his/her
interest, the excess payment can be viewed as bonus to the retiring partner.
21. A partnership is liquidated when its business operations are completely terminated
or ended.
22. The least priority of payment in case of partnership liquidation is the partners’
capital balances.
23. The computation of cash settlement to partners will depend on the method of
partnership liquidation may be lumpsum or installment liquidation.
24. The basic objectives of a partnership during liquidation process are to convert the
partnership assets to cash, to pay off partnership obligations and distribute
remaining cash and any unrealized assets to the individual partners
25. All deficient partners are insolvent partners.
26. A partner is solvent when the personal assets are less than the personal liabilities.
27. Cash distributions to partners is made based on profit or loss ratio.
28. If the deficient partner has loan balance, exercise marshalling of assets and
transfer the entire loan to his capital account.
29. The effect of marshalling of assets is that loan due to partners, which have a credit
balance, are combined with the respective partners’ capital balances.
30. Capital deficiency is eliminated by making additional cash investment if the
deficient partner is solvent and charging the deficiency as additional loss to other
partners if insolvent.

MULTIPLE CHOICE QUESTIONS:

1. If a new partner acquires a partnership interest directly from the partners rather
than from the partnership itself,
A. No entry is required.
B. The partnership assets should be revalued.
C. The existing partners' capital accounts should be reduced and the new partner's
account increased.
D. The partnership has undergone a quasi-reorganization.

2. Which of the following results in dissolution of a partnership?

A. The contribution of additional assets to the partnership by a new partner.
B. The death of the subcontractor of the partnership

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C. The winding up of the partnership and the distribution of remaining assets to the
partners.
D. The withdrawal of a partner from a partnership

3. The following is the priority sequence in which liquidation proceeds will be

distributed for a partnership:
A. Partnership drawings, partnership liabilities, partnership loans, partnership capital
balances
B. Partnership liabilities, partnership loans, partnership capital balances.
C. Partnership liabilities, partnership loans, partnership drawings, partnership capital
balances.
D. Partnership liabilities, partnership capital balances, partnership loans.

4. In accounting for the lump-sum liquidation of a partnership, cash payments to

partners after all non-partner creditors' claims have been satisfied, but before the
final cash distribution, should be according to
A. The partners' relative profit and loss sharing ratio.
B. The final balances in partner capital accounts.
C. The partners' relative share of the gain or loss on liquidation.
D. Safe payment computations.

5. Which statement below is CORRECT?

A. If a partner of a partnership is unable to pay a capital account deficit, the deficit is
absorbed by the other partners in the profit-sharing ratio of those partners.
B. Gains and losses from the sale of noncash assets are divided in the ratio of the
partners' capital account balances if there is no income-sharing plan in the
partnership contract.
C. A loan receivable from a partner is added to the partner's capital account balance.
D. Partners may receive cash after creditors receive cash when liquidating a
partnership.

6. This transaction will most likely be recorded in the partnership books as a transfer
within equity
A. B invests P500,000 cash for a 20% interest in the partnership.
B. A retires and the partnership pays C P60,000 as a full settlement of his capital
balance.
C. A withdraws from the partnership when he was bought out by C and D.
D. R dies and his wife receives settlement of R’s capital interest from the partnership.

7. Which of the following transactions or events does not affect the total assets of the
partnership?
A. An old partner retires and his capital balance is settled by the partnership at a lower
amount.
B. An incoming partner purchases interest from an existing partner.
C. A partnership is dissolved and its assets and liabilities are revalued to fair value.

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D. A new partners is admitted in a partnership when he invested noncash assets to
the partnership.

8. After admission of a new partner, the total partnership capital increased by the fair
value of the new partner’s contributions to the partnership. The admission was
accounted for
A. Under the asset revaluation method
B. Under the bonus method
C. As a purchase of interest
D. As an investment in the partnership

9. In the AB Partnership, A and B had capital ratio of 3:2 and a profit and loss ratio of
3:1, respectively. The bonus method was used to record C’s admission as a new
partner. What ratio would be used to allocate bonus to A and B?
A. A and B’s new capital ratio
B. A and B’s new capital ratio and profit and loss ratio.
C. A and B’s old capital ratio.
D. A and B’s old profit and loss ratio.

10. When A retired from the partnership of A, B and C, the final settlement of interest
exceeded A’ capital balance. Under the bonus method, the excess
A. Was recorded as debit to Bonus.
B. Was recorded as expense.
C. Reduced the capital balances of A and B.
D. Increased the capital balances of A and B.

11. State the proper order of liquidation

1. Outside Creditors
2. Owners’ interest
3. Inside creditors
A. 1, 3, 2
B. 1, 2, 3
C. 3, 2, 1
D. 2, 1, 3

12. When a new partner is admitted by his direct investment in the partnership and if
his agreed capital credit is more than his contributed capital, there is a
A. Bonus to new partner
B. Bonus to old partner
C. No Bonus to all partners
D. Claim from new partner

13. A partnership is considered insolvent when

A. At least one partner is insolvent
B. Its liabilities exceed its assets
C. At least one partner’s capital account has debit balance

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 D. Its liabilities and partners’ capital accounts exceed its assets

14. The rule of indicating priority of partners’ loan over partners’ capital is called
A. Right of offset
B. Right to collect
C. Marshalling of assets
D. Partner’s legal rights

15. When the payment is less than the capital interest of retiring partner. The journal
entry to record the bonus and payment is
A. Debit - Cash and Continuing partners’ capital account ; Credit – Retiring partner’s
capital account
B. Debit - Continuing partners’ capital ; Credit – Cash and Retiring partners’ capital
C. Debit - Retiring partners’ capital ; Credit – Cash and Continuing partners’ capital
D. Debit - Retiring partners’ capital and Continuing partners’ capital ; Credit – Cash

STRAIGHT PROBLEMS

ADMISSION OF A NEW PARTNER – Purchase

1. ABC Partnership had total capital of P570,000 on December 31, 2021 as follows:
A, Capital (30%) 180,000
B, Capital (45%) 255,000
C, Capital (25%) 135,000
Profit and loss sharing percentages are shown in parentheses. If D purchases a 25
percent interest from each of the old partners for a total payment of P150,000 directly to
the old partners. Compute the capital balance of A after admission.

2. A desires to purchase a one-fourth capital and profit and loss interest in the
partnership of B, C, and D. The three partners agree to sell A 20% of their
respective capital and profit and loss interests in exchange for a total payment of
P100,000. The payment is made directly to the individual partners. The capital
accounts and the respective percentage interests in profits and losses immediately
before the sale to A follow
B 168,000 50%
C 104,000 35%
D 48,000 15%
Compute the capital balance to be credited to A.

3. On December 1, 2022, C purchased an interest in the AB Partnership by paying

Partner A , P34,000 for 40% of her capital. On December 1, 2020, A capital
balance was P28,000 and B capital balance was P46,000. Compute the amount
of A, Capital to be debited in the partnership books.

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 4. A, B and C have existing balances of 100,000, 200,000 and 300,000 respectively
with profit ratio of 2:3:5. D is to be admitted into the partnership by purchasing 20%
each of the existing partners’ capital for P100,000. Compute the net assets of
the partnership right after the admission of D.

5. The capital accounts of the partnership of Nakpil, Ortiz, and Perez on June 1, 2023
are presented below with their respective profit and loss ratios:

Nakpil P 139,200 1/2

Ortiz 208,800 1/3
Perez 96,000 1/6
P 444,000
On June 1, 2023, Quizon is admitted to the partnership when he purchased, for P
132,000, a 1/5 interest acquired to each partner and share profits of the 1/5 of the firm.
Assuming that asset revaluation is not to be recorded.
1. What is gain realized by the partnership for admitting Quizon?
2. Compute the adjusted capital balances after dissolution.

Admission by investment

6. A and B are partners who share profits and losses on the ratio of 3:5, respectively.
On June 1, 2022, their respective capital accounts were as follows:

A 80,000
B 60,000

On that date, C was admitted as a partner with one-fourth interest in capital and profits
for an investment of P50,000. The new partnership began with total capital of P200,000.
Compute A’s capital immediately after C’s admission.

7. A and B are partners with capital balances of P375,000 and P125,000, and they
share profits and losses in the ratio of 2:1, respectively. On this date, C invests
P120,000 cash for a 20% interest in the capital and profit of the new partnership.
The partners agree that the asset revaluation method is to be recorded
simultaneously with the admission of C. Compute the total asset revaluation of
the firm.

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 8. A and B are existing partners with capital balances:
A 1,200,000
B 1,000,000
A and B share profits and losses on the ratio of 2:3, respectively. On May 1 ,2022 , C was
admitted as a partner with one-fourth interest in capital and profits for an investment of
P900,000. The new partnership began with total capital of P3,200,000. Compute B’s
capital immediately after C’s admission.

9. A, B and C have existing balances of P200,000, P280,000 and P320,000 with

Profits and losses shared 3:2:5 respectively. D is to be admitted into the
partnership by investing P200,000 and agreed to have 18% interest in capital and
profits of the partnership for his investments. The assets of the partnership need
not to be revalued Using bonus method, Compute the capital balance of C
immediately after D’s admission.

10. The capital balances in the ABC Partnership are:

A 600,000
B 500,000
C 400,000

Profit ratios are 5:3:2, respectively. The ABC partnership is formed by admitting D into
the firm with cash investment of P600,000 for a 30% capital interest. Using bonus method,
compute the bonus to be debited to A’s capital for admitting D.

11. C is a new partner and is admitted to the A & B Partnership under the bonus
method. C contributes cash of P20,000 and equipment with book value of 15,000
and a market value of P30,000 in exchange for a 30% ownership interest in the
new partnership. Prior to the admission of C, the capital of the existing partnership
was P130,000 and the assets were fairly valued. Using bonus method, compute
the capital balance to be credited to C.

12. The following is the condensed balance sheet of the partnership Jo, Li and Bi who
share profits and losses in the ratio of 4:3:3.

Cash P 180,000 Accounts, payable P 420,000

Other assets 1,660,000 Bi, Loan 60,000
Jo, receivable 40,000 Jo, Capital 620,000
Li, Capital 400,000
__ Bi, Capital 380,000
Total P 1,880,000 Total P1,880,000

Assume that the assets and liabilities are fairly valued on the balance Sheet and
the partnership decides to admit Mac as a new partner, with a 20% interest. No
asset revaluation or bonus is to be recorded. How much Mac should contribute
in cash or other assets?

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 13. Gilbert and Joshua were partners with capital account balances of ₱260,000 and
₱240,000, respectively, and shared profits and losses in the ratio of 6:4,
respectively. The partners decided to admit Lie as a new partner for 150,000
equivalent to 20% equity interest of the total partnership. Asset revaluation should
be recognized. What would be the balance of Gilbert’s capital account after
admission of Lie?

14. Hansel and Gretel are partners. Hansel's capital balance is ₱130,000 and Gretel's
is ₱150,000. They agreed to share equally in profits and losses. Both partners
agree to accept a third investor, Mocha as a new partner with a 25% interest in the
partnership. Mocha intends to invest ₱115,000 in cash. The bonus that is granted
to Hansel and Gretel is closest to____.

New P &L Ratio

15. The old partnership of A & B reported the following:
Profit or
Partners Capital Loss ratio
A 200,000 40%
B 300,000 60%
If C is to be admitted for 20% interest in the partnership’s assets and 20% profit sharing
by investing P125,000. Compute the new P&L ratio of B.

16. The old partnership of A & B reported the following:

Profit or
Partners Capital Loss ratio
A 500,000 70%
B 300,000 30%
If C is to be admitted for 30% interest in the partnership’s assets and 30% profit sharing
by investing P525,000. Compute the new P&L ratio of A.

Withdrawal or Retirement

17. Long-term partners, A, B, and C have capital balances of P160,000, P60,000 and
P50,000, respectively. They share in profits and losses 5:3:2, respectively. All
assets are valued fairly. C decides to retire from the partnership. C sells the interest
to B for P25,000. Compute B’s capital balance after the C withdrawal.

18. A, B and C have existing balances of 50,000, 100,000 and 150,000 respectively
with profit ratio of 1:1:3. A retired from the partnership by selling his whole interest
to D, an incoming partner for P120,000. Compute D’s capital balance after the A
withdrawal.

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 19. Long-term partners, A, B, and C have capital balances of P100,000, 60,000 and
P40,000, respectively. They share in profits and losses 4:4:2, respectively. All
assets are valued fairly. C decides to retire from the partnership. C sells the interest
to the partnership for P45,000. Bonus method is used. Compute A’s capital
balance after the C withdrawal.

20. Long-term partners, A, B, and C have capital balances of P100,000, 60,000 and
P40,000, respectively. They share in profits and losses 5:3:2, respectively. All
assets are valued fairly. C decides to retire from the partnership. C sells the interest
to the partnership for P45,000. Bonus method is used. Compute the total assets
of the partnership after retirement.

21. Long-term partners, A, B, and C have capital balances of P120,000, P80,000 and
P120,000, respectively. They share in profits and losses 4:2:4, respectively. C
decides to retire from the partnership. C sells the interest to the partnership for
P140,000. Asset revaluation is recorded. Compute the total asset revaluation.

22. Long-term partners, A, B, and C have capital balances of P120,000, P80,000 and
P120,000, respectively. They share in profits and losses 3:2:3, respectively. C
decides to retire from the partnership. C sells the interest to the partnership for
P140,000. Asset revaluation is recorded. Compute A’s capital balance after
retirement.

23. Long-term partners, A, B, and C have capital balances of P120,000, P80,000 and
P120,000, respectively. They share in profits and losses 3:2:3, respectively. C
decides to retire from the partnership. C sells the interest to the partnership for
P140,000. Asset revaluation is recorded. Compute total assets after retirement.

24. On June 30, 2023, the balance sheet for the partnership of A, B, and C, together
with their respective profit and loss ratios, was as follows:

Assets, at cost P 180,000

A, capital (20%) 51,000

B, capital (20%) 39,000
C, capital (60%) 90,000
Total P 180,000

A decided to retire from the partnership. By mutual agreement, the assets are to be
adjusted to their fair value of P 216,000 at June 30, 2023. It was agreed that the
partnership would pay A P 61,200 cash for A’s partnership interest. No asset revaluation
is to be recorded. After A’s retirement, what is the balance of B’s capital account?

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 25. On June 30, the balance sheet for the partnership of W, B and L together with their
respective profit and loss ratios was as follows:

Assets, at cost P300,000

L, capital (20%) 70,000

B, capital (20%) 65,000
W, capital (60%) 165,000
Total P300,000

W has decided to retire from the partnership and by mutual agreement the assets
are to be adjusted to their fair value of P360,000 at June 30. It was agreed that the
partnership would pay W P102,000 cash for his partnership interest.

After W’s retirement what are the capital account balances of B and L,
respectively?

26. On June 30, 2023, the condensed balance sheet for the partnership of Eddy, Fox,
and Grimm, together with their respective profit and loss sharing percentages were
as follows:
Assets, net of liabilities 320,000

Eddy, capital (50%) 160,000

Fox, capital (30%) 96,000
Grimm, capital (20%) 64,000
Total 320,000

Eddy decided to retire from the partnership and sold his interest to Fox for P100,000.
After Eddy’s retirement, what are the capital balances of the other partners? Fox
and Grimm, respectively

27. A ,B and C are existing partners with capital balances as of January 1, 2022:
A 100,000
B 150,000
C 200,000
They share profits and losses on the ratio of 3:3:4, respectively. On September 1, 2022,
A retired from the partnership.

Partners agreed that at the time of withdrawal, assets should be revalued to a net increase
of P20,000. The partnership net income for eight months is P120,000.

The partnership agreed to pay A for P163,000 for this interest. Compute B’s capital
balance after retirement.

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 28. A ,B and C are existing partners with capital balances as of January 1, 2022:
A 100,000
B 150,000
C 200,000
They share profits and losses on the ratio of 3:3:4, respectively. On September 1, 2022,
A retired from the partnership.

Partners agreed that at the time of withdrawal, assets should be revalued to a net increase
of P20,000. The partnership net income for eight months is P120,000.

The partnership agreed to pay A for P163,000 for this interest. Compute C’s capital
balance after retirement.

29. A ,B and C are existing partners with capital balances as of January 1, 2022:
A 100,000
B 150,000
C 200,000
They share profits and losses on the ratio of 3:3:4, respectively. On September 1, 2022,
A retired from the partnership.

Partners agreed that at the time of withdrawal, assets should be revalued to a net increase
of P20,000. The partnership net income for eight months is P120,000.

The partnership agreed to pay A for P163,000 for this interest. Compute the net assets
after retirement.

PARTNERSHIP LIQUIDATION

30. After operating for 5 years, the books of AB Partnership showed the following
balances:
Assets (Cash and Non-cash assets) 130,000
A, Capital 50,000
B, Capital 80,000
If liquidation takes place at this point and non-cash assets are realized at book value
amounting to P80,000. Profits and losses are shared equally. Compute the amount of
cash distributed to the partner A in the final settlement of their capital accounts.

31. After operating for 5 years, the books of A and B showed the following balances
with equal distribution in profit:
Assets (Cash and Non-cash assets) 130,000
A, Capital 60,000
B, Capital 70,000
If liquidation takes place at this point and the net assets are realized at P150,000. Profits
and losses are shared equally. Compute the amount of cash distributed to the partner B
in the final settlement of their capital accounts.

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 32. G, M and A are partners with a profit and loss ratio of 4:4:2. The partnership was
liquidated and prior liquidation process, the partnership Statement of Financial
Position was as follows:

Cash 80,000
Other Assets 520,000
A, Capital 320,000
B, Capital 220,000
C, Capital 60,000

After the partnership had been liquidated and the cash had been distributed, B received
P128,000 in cash as a full settlement of his interest. Compute the selling price of the
assets.

33. A, B, and C decided to dissolve and liquidate the limited partnership on September
31, 2022. The partnership’s Statement of Financial Position shows the following
balances:
Cash 35,000
Non-cash Assets 100,000
Liabilities 30,000
A, Capital 50,000
B, Capital 30,000
C, Capital 25,000
A, B, and C shared profit and losses in a 2:1:1 ratio, respectively. C received P5,000 as
final settlement. Compute the selling price of the noncash assets.

34. The partnership of A, B, and C had the following account balances and
percentages for the sharing of profits and losses:
Cash P 80,000
Noncash assets 205,000
Liabilities 47,000
A, Capital (30%) 138,000
B, Capital (30%) 119,500
C, Capital (40%) (19,500)
The partnership incurred losses in recent years and decided to liquidate. Assuming C is
solvent. Noncash assets were sold for P100,000. Compute the final settlement to B.

35. The partnership of A, B, and C had the following account balances and
percentages for the sharing of profits and losses:
Cash P 80,000
Noncash assets 205,000
Liabilities 47,000
A, Capital (40%) 138,000
B, Capital (40%) 119,500
C, Capital (20%) (19,500)

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The partnership incurred losses in recent years and decided to liquidate. Assuming C is
insolvent. Noncash assets were sold for P100,000. Compute the final settlement to A.

36. As of December 31, 2021 (full year), A, B and C Partnership has the following
data below before liquidation:
Cash 10,000
Noncash 100,000
Accounts Payable 5,000
A, Loan 5,000
A, Capital 25,000
B, Capital 35,000
C, Capital 40,000
Assuming that non-cash were sold for P10,000. The profits and losses are shared equally.
Compute the cash received by C for the final settlement of his capital balance.

37. The following condensed balance sheet is presented for the partnership of BBB
and AAA, who share profits and losses on the ratio of 60:40, respectively:

Other assets P 450,000

BBB loan 20,000
P 470,000

Accountspayable P 120,000
BBB, capital 195,000
AAA, capital 155,000
Total P 470,000

The partners have decided to liquidate the partnership. If the other assets are sold
P385,000, what amount of the available cash should be distributed to BBB

38. On December 31, 2023, the partners of MNP Partnership decided to liquidate their
business. Immediately before liquidation, the following condensed balance sheet
was prepared:

Cash 50,000
Noncash assets 900,000
Total P 950,000
Liabilities 375,000
Nieva, loan 80,000
Perez, loan 25,000
Munoz, capital (50%) 312,500
Nieva, capital (30%) 107,500
Perez, capital (20%) 50,000
Total 950,000

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The noncash assets were sold for P400,000. Assuming Perez is the only solvent partner,
what amount of additional cash will be invested by Perez? (rounded to the nearest peso)

39. The partners Melchor Bombero, Felipe Niza, and Doris Pateño who shared profit
and losses in the ratio of 4:2:2, has decided to dissolve and liquidate their
partnership.In the process of liquidation, their non-cash assets of P490,000 was
realized at a loss of P340,000. however, they were able to pay their obligations to
outside creditors of P105,000. The partner’s equity balance before the start of
liquidation has totaled to P450,000, broken down as follows:
Bombero P180,000; Niza P150,000 Pateño P120,000
How much was the cash balance at the beginning of the liquidation process?

40. Facing financial distress, partners Gary (40%), Gerry (30%), and Gina (30%)
decided to liquidate the partnership on September 30, 2019. Their capital balances
as of December 31, 2018 were ₱50,000, ₱60,000, and ₱20,000, respectively. The
net income from January 1 to September 30 was ₱44,000. On the date of
liquidation, cash and liabilities amounted to ₱40,000 and ₱90,000, respectively.
For Gary to receive ₱55,200 in full settlement of interest in the partnership, how
much should the non-cash assets be sold for?

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